‘Even keel’ economy risk at 3.35% cash rate: CBA

Commonwealth Bank Australia (CBA) is expecting the current cash rate increases to peak at 3.10 per cent either next month in December or by February 2023, but what the Reserve Bank of Australia (RBA) actually will announce will depend on two “critical inputs” of data, it has explained.

Over the next two days the Australian Bureau of Statistics (ABS) will publish key data relating to the labour market: an update on wages growth over the September quarter (the 3Q22 Wage Price Index) and the October unemployment rate, CBA has highlighted.

“Our central scenario is for the RBA to raise the cash rate by 25bp at the December Board meeting,” an official CBA statement in response to the RBA’s minutes of the Monetary Policy Meeting of the RBA Board, released Tuesday (15 November).

“But given the RBA has flagged the idea of pausing in the tightening cycle, a rate hike in December is not a done deal - particularly if the data over the next two days comes in softer than anticipated. 

“We expect the peak in the cash rate to be 3.10 per cent (reached either next month … February 2023).

The big four bank did, though, provide the following scenario warning: “The risk lies with a higher cash rate of 3.35 per cent,” it stated.

“Financial markets have currently priced a peak in the cash rate of 3.85 per cent, to be reached in Q3 23.

“We believe that if such pricing is realised [then] the Australian economy will not have a soft landing and the unemployment rate will rise materially above the level consistent with full employment.

“Such an outcome is not what the RBA is trying to achieve,” it explained. 

Pausing the tightening cycle

In further analysing the RBA November Board minutes, CBA highlighted a key recent theme, that: “the Board is prepared to keep rates unchanged for a period while it assesses the state of the economy and the inflation outlook”. 

“In short, the RBA has stated on five consecutive occasions over the past two weeks that it is willing to keep monetary policy on hold for a period.

“Such a move would see the RBA retain a tightening bias. That is, the board would be willing to move the cash rate higher if the economic data and outlook warranted further rate increases (the board has not ruled out returning to larger rate hikes if the situation warranted).

“By the same token the board may come to the conclusion that the economy does not require further rate rises.

The big four bank said its analysis indicated that taking the policy rate above 3.10 per cent and deeper into restrictive territory would be inconsistent with keeping the economy ‘on an even keel’, a term the RBA has often repeated.   

“We are encouraged that the RBA is open to the idea of pausing and that they continue to reiterate this new message,” the CBA explained.

“Our central scenario for a peak in the cash rate of 3.10 per cent is premised on the notion that the RBA will pause after an expected 25bp rate hike in December.

“Some softening in the activity data over summer, as we expect, would support such an approach to policy setting early next year.”

Resi lending up $5.1 billion: CBA Q123

CBA’s comments came as the group announced it had delivered a Q1F23 8.6 per cent increase in domestic household deposits (year-on-year) underwritten via a 6.3 per cent hike in home lending and a 12.6 per cent increase in business lending.

In the three months to 30 September 2022, the bank outlined that its home lending grew by $5.1 billion, business lending by $1.6 billion and achieved household deposit growth of $7.9 billion.

Home loan arrears also remained low, supported by a strong labour market, it confirmed.

Describing its results as “a solid start to the 2023 financial year”, CBA’s first quarter trading update reported an after-tax cash profit (NPAT) of $2.5 billion with “consistent and disciplined execution of its strategy delivering strong financial and operational outcomes.”

This “unaudited” cash NPAT was 2 per cent up on the quarterly average of CBA’s second half of FY22 and 13 per cent ahead on the prior corresponding period for the first three months of FY22, CBA explained. Unaudited statutory NPAT came in at $2.7 billion for the quarter, it stated.

Additionally, operating performance rose 12 per cent compared to the quarterly average of the second half of FY22, driven by “higher operating income including stronger deposit earnings and volume growth across all core products”.

This increase was partly offset by the impact of competition and rising interest rates on lending products, it explained.

CBA CEO Matt Comyn said the first quarter trading performance underscored the consistent and disciplined execution of the group’s strategy.

“In a competitive environment we remained disciplined and achieved good volume growth in our core markets,” Mr Comyn said.

"The economy has shown resilience in the face of growing cost of living and interest rate pressures and, despite these near-term challenges, we remain optimistic on the medium-to-long-term outlook. 

"We recognise the concern and pressure many customers are feeling due to the higher cost of living, and increases in the cash rate.

“As well as providing a range of measures to help these customers, we also supported customers and communities impacted by natural disasters, particularly those affected by recent flooding," he explained.

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